#FASuccess Ep 198: How The Creator Of The 4 Percent Rule Applied It For His Clients And His Own Retirement, With Bill Bengen

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

What You’ll Learn In This Podcast Episode

Resources Featured In This Episode:

Did you enjoy the Financial Advisor Success Podcast?

And if you have a moment, please Click Here to leave us a rating and review in iTunes!

Full Transcript:

Michael: Welcome, Bill Bengen, to the “Financial Advisors Success” podcast.

Bill: Glad to be here, Michael.

Michael: I’m really looking forward to the podcast today and having you on as a guest. The research that you did around retirement withdrawals – what I think now we sort of collectively call the 4% rule – has been around for more than 25 years since you originally published the article on it. You, I know, lived your own career as a financial advisor doing this live with clients, and have since retired and sold your practice.

And so, I’m fascinated both to hear a little bit of the origin of that research, where it came from, what it looks like in practice as someone that was doing this live with clients and having these conversations, and even what it looks like now from the other side of… Now that you are a retiree and reflect back on this research, does it feel the same now that you’re living the retiree path versus the advising retirees path? So really excited to have you on the podcast and talk about this retirement research journey that you’ve been on.

Bill: Yes, that should be fun.

Michael: So, I guess to kick us off on this, tell us a little bit about the advisory firm that you had when you were in practice. I know you’ve since sold it. We’ll talk about that a little bit later. But just to give people the context of Bill Bengen, the financial advisor, when that was your main thing that you were doing for so many years. What did your advisory firm practice look like?

How Bill Created A Successful Fee-Only RIA Before Fee-Only Firms Were Popular [04:23]

Bill: I was the sole practitioner. My wife was the only other individual in the firm. She handled all the administrative matters and thank goodness I had her; I couldn’t have done it without her.

But I attempted to go out on my own, hang up my shingle individually, and actually operated my practice out of an office attached to my home with a private entrance, which is something I considered ideal. I didn’t want to commute. I commuted in New York for many years to the job I had there. I wanted to be out of the house and comfortable and be able to live with young children and, you know, have reasonable hours.

So I did that. Whether I would do that today, I doubt it. I don’t think I’d want to become a solo practitioner and financial planner today. I think it’s just too complex. I think I’d probably want to be part of a larger firm, but that’s how I did it back then.

Michael: Interesting. And was that because you felt like the business was less complex back then to have to deal with or there just weren’t a lot of choices? Because today, we have a lot of large firms you can affiliate with as an advisor if you want to. Back then it was kind of you’re in a large broker-dealer environment or you’re setting up your own shop as a sole proprietor. There were no in-betweens.

Bill: Yes, I think the matter of choice was very important. There were very few options, if any, available back in the early ’90s in all of the fee-only financial firms that I would be interested in being involved with. So I started my own with a thought that maybe later on I’ll eventually join another firm. But that turned out not to be necessary. But the complexity of what we do, and what I don’t do, but you folks do nowadays, and the increased regulatory burden is… My hat’s off to you for being able to handle it.

Michael: So for you, the challenge with being the sole proprietor wasn’t necessarily the having-and-servicing-clients part; it was the compliance and regulatory burden that was the concern and the challenge point?

Bill: Yes, that’s exactly it. And also, as the complexity of the business grew, you needed expertise in more and more areas. It became more and more difficult for one individual to wear all those hats.

Michael: Right. If your client base keeps getting broader and more complex, there are more areas of expertise you need if you don’t pick something to specialize in and focus on that and just get reputable expertise in one area.

Bill: That’s right.

Michael: So, really, two questions. One, why did you land in this? I think, as you said, the RIA fee-only world in the first place – because particularly in the early 1990s when you were starting your firm, that was not common. There were not a lot of fee-only RIAs out there. Schwab had only just created a service where you could even manage assets for clients on an RIA platform. That was just a new thing at the time. So what led you there when almost everything in the advisor world was broker-dealer based at that point?

Bill: Well, I wanted it to be fee-only because when I managed our soft drink bottling firm back in New York, I also managed the investment portfolio for the firm and I dealt with brokerage firms. And quite frankly, my experience with those firms was not a very good one. I found those people were not the type of people who I wanted to be – as a client, come to later years – at financial planning advice because I knew they were selling. And sometimes, the methods they used were very underhanded and unsavory. So I definitely wanted to be outside the brokerage world and inside the fee-only world. And I attended a NAPFA meeting in 1989 and people were so nice and I felt so comfortable. It made up my mind instantly.

Michael: Interesting. So NAPFA was the fee-only network in a world where, particularly then, almost all the industry was brokerage then? I don’t even know what the size of NAPFA was then. I would imagine maybe a few hundred people in total? I know they only got started in 1983. So you were all about five or six years in when you got out to the organization?

Bill: That’s right. NAPFA was really the Wild West in those days. It attracted a lot of independent-thinking people who had very strong ideas about how they wanted to do things in their practice, which included me. And they didn’t necessarily tolerate other viewpoints well, so it was an interesting experience. Of course, that’s changed.

Michael: How did you find NAPFA? I’m just curious. You were a “consumer” at the time running the family bottling company business, thinking, “Maybe I want to do this financial services thing.” How do you land on NAPFA – at that time a very small organization at the fringe of doing fee-only financial planning when everybody else is in the brokerage world? How did you get there?

Bill: I read about it in an article in “Money” magazine, believe it or not, about this organization.

Michael: Very cool. So you read about NAPFA in “Money” magazine and said, “Hey, this sounds neat. I’m going to go check this out.” And here are all these people that are saying, “You can totally run a financial planning business all by yourself, charge fees. It’s going to work, come on in, Bill, try it out.”

Bill: They were true believers then. And it was almost like you were going to get a religious fervor. And I bought it, hook, line, and sinker. And I’m glad I did because everything they told me was possible, particularly in those days, you know, 30 years ago.

Michael: So as you were transitioning in, what were you transitioning from? What were you doing previously? You mentioned briefly that you were in a bottling business.

Bill’s Career Path Transition From Aerospace Engineering To Financial Planning [10:16]

Bill: Yes. Originally, I was trained as an aerospace engineer at MIT. I really wanted to be involved in planetary exploration. That’s what excited me. That’s what got me going. But, as I progressed in my studies and the moon program started to wind down, there were no plans for anything beyond that. And I realized that, basically, the best I can hope for would be to be an engineer drafting and drawing somewhere at a big corner with hundreds of other engineers. And that didn’t appeal to me.

So I really lost interest in my major. And I’m lucky I got out of MIT in one piece, quite frankly. And I joined the family soft drink business. They had a franchise for 7Up and other brands that they had held since the 1920s, 1930s. Actually, the business began in the late 19th century. And I swore I would never do that. I did not want to join the family business. It was not something I wanted to do. This is about as far away from space exploration – filling soft drink bottles – as you can imagine.

But I did, and I learned a lot. It was a wonderful experience because I learned about the business. I learned about profit-and-loss statements. I understand why businessmen make decisions they do, the conflicts they face, and the difficulties they… So it’s invaluable training for me, it turned out.

Michael: Very cool. And so, what ultimately led to the shift where suddenly you go from the family business that was around since the late 19th century to here at this NAPFA meeting getting bought into the opportunity to be a personal financial planner?

Bill: Yes, I remember having a bad dream one night. And the next morning, I walked into my dad’s office. He was the chairman of the company. I said, “Dad, we’ve had this business in our family for exactly 100 years, 1887. But I think it’s time to sell; time to fold them.” And I sat down and went over with him how far the company had fallen behind the competition. That it was almost impossible to catch up, and sometimes you just have to cash the chips in. And we did. It went very well that we did because a few years later, the 7Up brand, which was our mainstay – our largest and most profitable product – collapsed in share.

Michael: Interesting because another competing bottler came in and won a contract away from the company, essentially?

Bill: No, it’s just that we were number three into the New York metropolitan area. We served about 7 million people. It sounds like a lot, but Coke and Pepsi were much bigger than we were. They enjoyed enormous efficiencies of production, so they produced the product for a lot less. And we were just gradually falling further and further behind. And I saw no chances to catch up. So much for market timing. You know, people don’t say market timing, but it worked in my case.

Michael: So you say it feels a little bit different when you’re a private business with a little bit more of an inside perspective on what’s going on and the dynamics of the business?

Bill: Yes, absolutely.

Michael: So you guys essentially made the decision in the late 1980s, “We’re going to sell the family business. We’ve had a great 100-year run, but it’s not competitive. We’re falling behind. It’s time to sell and get out while the times are pretty good.” So, you made this decision, and now, all of a sudden, it’s like, “So, sold the family business, still have a working career left.”

Bill: That’s right.

Michael: We’re not sending people to other planets right now, so I’ve got to find something to do.

Bill: Find something on this planet, I have to do. Yes. And I had some money as a result of the… I knew I was going to have to have financial planning needs, and I thought to myself, “Why don’t I just simply educate myself on this so I can handle this myself and perhaps that will be a business opportunity for me as well that I could handle, you know, out of a home office?” And that’s why it worked.

Michael: Interesting. So was it really starting for you directly as, “I just want to learn about financial planning because I want to do it for myself,” and the decision to become an advisor came later? Or did this sort of crop up together like, “Well, I’m going to be an advisor and I’ll also learn some stuff for myself along the way?”

Bill: It’s probably over a period of a couple of months. The idea revolved from a self-help idea to a career.

Michael: Okay. And how were you going about that? Was this, like, were you going to find things like CFP certification at the time? Were you just reading consumer information in general and trying to educate yourself in the finance area? Were there other programs or education you were looking for?

Bill: Yes. Well, once I thought I was going to be serious about being a professional, I signed up for the CFP. Of course, I took courses. Back then, there were six individual segments with individual tests. So I spent several years getting that and got my CFP certification. And eventually, for a master’s degree at the College for Financial Planning.

Michael: Right. Because, I guess, I’m trying to think back to the history. The comprehensive exam for CFP certification came about in the early ’90s. I think ’91 or ’93. So, when you were in, it was the six individual courses, but just you got through the six courses, you completed the exam for each, and then you’re done when you got through all of them?

Bill: I think I was one of the last in the group. And then I decided to go for the CFA as well. And I passed the first test, but at that point, my practice was growing so rapidly. I really didn’t have time to study. So I decided to pass on that further study in that field.

Michael: All right. So as you got launched, what did you launch with? What did you start with? Who did you go after? How did you start going out there as a financial advisor and getting clients starting from scratch with no history in the business?

How Bill Started Finding Clients And Building His Business [15:58]

Bill: Yes, that was scary. Well, I had a little help from my family, okay, who gave me some of their accounts. And then I lived in a neighborhood where I developed a lot of friends. And they’re all in kind of my age group and they’re just starting to think seriously about retirement, and they were concerned in the early ’90s.

So they were happy to have somebody in the neighborhood who wasn’t selling them an insurance policy, who was going to give them financial advice. So, the practice just kind of grew. I got a lot of local folks. And they referred me. And I’ve never advertised. I never signed up for any of those programs for referrals. I was able to very fortunately build my business through existing clients and referrals.

Michael: Interesting because I guess, as noted at that time, particularly being a fee-only financial planner in a world where I think, literally, like 98% to 99% of financial advisors were at brokerage firms or insurance agencies, being there as a financial planner without anything to sell them and just giving advice effectively was this very narrow niche, at the time, that they didn’t see from anyone else. So to be able to say, “I’m the one in the neighborhood that does this” was very differentiated.

Bill: In the county or wherever. You’re absolutely right, very sparse financial fee-only advisors at that time. So people did seek me out. They’ve been reading, I’ve been publicized, and they wanted it. So, it worked out great. In the flow of things, it’s nice to be riding with the tide, whatever you’re doing in life.

Michael: And so, was this still in the New York area where you had been with the family business previously? Is that where you built your advisory firm?

Bill: No, no, actually, we moved to California shortly after we sold the business in New York. I had a friend who lives in San Diego and he said, “Why don’t you come out in this area?” You know, we took our kids out there. They’re like 7 or 8 at that time and had Thanksgiving dinner. It was like 80 degrees for 4 days and said, “What are we doing in New York? What are we doing in New York?”

We made a very quick… And we’ve done – Cookie and I, my wife – we make these big decisions usually very quickly because we both know what we want. We just pulled up stakes and took our kids and bought a house and took us from there. And this, a little out of risk in an approach like that. I knew I had got to find employment, but it worked out.

Michael: So as you got sort of building with a local network and a local neighborhood – like this wasn’t the neighborhood you’d been in for years and years that you developed relationships. And this was like, I relocated to the area and then had to go out there and show people what I was doing and how it was different from everybody else, which at that time, was very different than almost everybody else. And that was part of, I guess, the differentiation that got it going pretty quickly for you.

Bill: Yeah, I think the MIT credentials were helpful. Later on, authoring papers on the 4% rule became important for drawing customers in, too. I got a little publicity from that. But, yes, it’s never easy, but it happened.

Michael: So talk to us now about the evolution of the 4% rule research that you did. So you went to the infamous NAPFA meeting in 1989, you got started shortly thereafter. And it wasn’t that long thereafter, I know, that the first paper came out, as memory serves, your first paper on what we now call 4% rule was 1993 or ’94 in the “Journal of Financial Planning.”

Bill’s Research And The Creation Of The 4 Percent Rule [19:37]

Bill: Right.

Michael: So talk to us about, I guess, where that research came from? What was going on at the time that made you say, “Okay. I want to do some research and write a paper about this and take a swing at what I think is going on with this retirement thing?”

Bill: Yes, I can tell you, the last thing I wanted to do with a fast-growing practice was to get involved in a research project that would take several thousand hours of my time, evenings, and weekends. But clients were coming to me and they were asking, “I want to save for retirement. How should I save? How much should I save? And then, when I go into retirement, how am I going to spend this money? How do I set my investments up?”

I just completed a CFP course within the last year, 18 months. That’s about ’93. And I couldn’t recall anything in any of those textbooks that address these issues. And I went back and looked at the textbooks, and I didn’t see anything. And I tried to read. It wasn’t as easy back then to research things on the internet as it is today. But I looked at books; I spoke to people.

I got a lot of different answers. Those seemed to be rules of thumb based on vague experience. No one had any definitive analysis that I could find. So I said, “I guess I’m going to have to do it.” So I just got out my computer and my spreadsheet, got a copy of the Ibbotson data based on…and started cranking numbers. That’s what it came down to.

Michael: Very cool. And so, did you have a working hypothesis? Did you have something you were going for? Was there something you were aiming for or let’s just kind of wait into some data and see what we find?

Bill: That’s exactly the process I took. There are certain issues I wanted to explore, like what was the safe withdrawal rate? That was one of the big questions I had. I found it was very important in this research that you don’t have any preconceived notions because I was – over the years, I’ve been constantly surprised by the results I had. And if I’ve gone into it with was some fixed idea, I might have missed a very critical aspect of it. I guess, like in all scientific research, you try keep your mind a blank and just follow where the data takes you.

Michael: And so, can you set the context for us at that time? What were the rules of thumb and things going around at the time that you were looking and saying, “Yeah, this isn’t cutting it, we got to go a little deeper on this?”

Bill: Well, some people said the average portfolio return is what, 7.5%? A 60/40 over time, so you should be able to take out 6%, 7%, no problem. A lot of people said, “Oh, my goodness, you’re in retirement now. You have to be in bonds, 100%. You can’t afford the risk of the stock market. What are you thinking?”

And of course, when I get into the data, neither one of those positions turned out to be viable. They were both wrong.

Michael: So you dug into this. How did you ultimately come to this number of 4%? What made 4% the magic number that says this is the one that Bill has dubbed safe for all of us?

Bill: Well, I guess, experiment with portfolios of different allocations and just took the withdrawal rate down until I got one that lasted, a portfolio that lasted 30 years. And at that time, I was only working with two asset classes, basically, large company stocks and treasury notes. And I got a number of 4.15%. I created this chart and I looked at it and I said this is amazing because withdrawal rate is the same over a very wide range of stock allocation, I think between 45% and 75%, it was about the same.

So at that point, it didn’t appear to make too much difference what you choose. But I knew that a very heavy stock allocation was bad and a very low stock allocation was bad. So I came out with a number and, of course, that number has haunted me for years since then because… You’re a sophisticated person, you know that one number cannot represent the experience of so many different retirees. There’s just too many dimensions to the problem to have a one-number solution.

Michael: The irony is not lost on me that you started out this story by pointing out, “Bill, why did you do the research?” “Well, I wanted to bust up these ridiculous rules of thumb with something that’s more rigorous.” And to think you went out with the thing that became so popular, people started calling it a rule of thumb and saying that’s ridiculous because it’s too generalized. So funny how these things sometimes come full circle on us.

Bill: Yes, I don’t think I ever used the term 4% rule, I don’t believe so. That was kind of a creation of the media. When I got introduced to the media, they wanted something simple, I understand, to present to their readers. And they focused on that and said, “This is the answer,” like a tic-tac-toe game, put the X here.

But I thought about it for a while and I said, “What the heck?” At least here’s information getting out there, which is more accurate than the information that was out there before. And I can always clarify things if they have questions.

Michael: Right. Yes, I mean, to remind you – even Markowitz’s modern portfolio theory, he didn’t call it modern portfolio theory. I think he called it the ‘E-V rule for expected return volatility rule’ because he made this two-dimensional chart of expected returns on volatility. It was only later that we decided to call it modern portfolio theory. And I think the original title of your paper was just ‘using historical data to determine withdrawal rates’. We called it the 4% rule later.

So, I think it’s interesting that you framed that and you said, “I put this historical data in there from Ibbotson. And I just kept dialing the withdrawal rate down until I got to something that worked for all 30 years and all the different 30-year scenarios.” So I think there’s still sometimes this impression or view out there of, well, “The 4% rule worked in all the old data because we used to get better return environments, but now we’re in this low interest rate, lower return environment, some of this stuff’s going to work anymore because we’re not getting average historical rates of return from today,” or at least some people don’t think we’re going to get average historical rates of return going forward from today.

But your actual original study had nothing to do with average historical rates of return. The whole point was, “Let’s look at actual sequences historically and find what would have worked in – basically, what would work in the worst one.” Because if it survives the worst one, then it survives all of them and that’s where 4.15% came from. It’s the thing that worked in the worst scenario, not the thing that worked in the average scenario.

Bill: Yes, that’s exactly correct. And that’s caused me some problems with some advisors because they felt it wasn’t adequate. It was too low. And I tried to explain to them, “I understand what you’re saying. There should be other numbers for other people with other situations, but this is what we have been publicized now.”

Michael: Again, it strikes me, some of the irony of how all these things evolved, where you put out a 4% rule in a world where your balanced portfolios were doing 7.5% plus people were saying take 6% and 7% in and you’ll be fine in the early 1990s. I mean, heck, even six or seven probably sounded conservative because the S&P was doing double-digit returns for more than a decade at that point with just a small fast recovery blip in 1987.

So in the middle of that environment, you said, “Let’s look at all the historical data.” We get this number 4.15%. We can rerun the research today, you know, historical data is still the same historical data, we still came up with the same 4.15% today. But now, we criticize the 4% rule, not saying that it’s too low. Now, we say it’s too high. Even though it’s the same data, like the only thing that has changed is our current recent environment when the markets were good in the ’90s, we said 4% sounds too low. Now returns have been weaker, and we say 4% sounds too high. And it’s actually the same worst-case historical scenarios that are guiding it in all of these situations.

Bill: Yes, I think people have to realize that when they use the 4.5% rule, as you mentioned, it’s a worst-case scenario. It was in an inflationary environment. And based on what I know now, in a very low inflation environment like we have now, if we had modest stocks, I wouldn’t be recommending 4.5%, I’d probably be recommending 5.25%, 5.5%, something like that, which is even going to enrage people even more because it’s higher than the 4.5%. But that’s what history has demonstrated.

Whether our current environment is going to cause such low returns that’ll undermine that whole structure, I don’t know. But people have to keep in mind that inflation is equally important as returns in this analysis. And that when you have a low inflation environment, your withdrawals are also going up much more slowly. So there’s an offset to the lower returns that you can’t ignore.

Michael: Right. That’s, I guess, for better or worse, part of the consolation right now – a lot of people will point out like, “But Bill, we only get half a percent on some of our bond returns right now. When you were doing that research, you could get 6%, 7% to 8%.” It’s like, “Yes, but when you were doing the research, we were coming off double-digit inflation environments not that many years before.”

And now we’re sitting at inflation that – I think the Fed is just praying it doesn’t go negative at this point. So we’re hovering at the zero bound. So when you start looking at things like real rates of return after inflation, they’re not nearly… We may be in a somewhat lower return environment, but they’re not nearly as low a return as sometimes we make it out to be because we look at the nominal and forget the real.

Bill: Yes, I absolutely agree with that. I think it’s an overreaction. I haven’t been able to develop scenarios myself in our low inflation environment where it goes below 4.5%. So I’m not sure where those concerns are coming from. I haven’t seen the background work behind those claims, those concerns.

Michael: So I’m struck as well now. You have mentioned it a few times here; you have called it the 4.5% rule. So when did you move from 4% to 4.15% to 4.5%?

The Transition Of The 4 Percent Rule To Become The 4.5 Percent Rule And How Bill Used The Rule With His Clients [29:55]

Bill: Sure. You remember, originally, I was just working with two asset classes. And then in 2005, while I was working on my book, I introduced small cap stocks, U.S. small cap stocks, which really juiced everything. The return – they didn’t have a perfect correlation with large cap, so that juiced it from 4.15% to almost 4.5%. I use them as a proxy for a wide variety of asset classes, international stocks, REITs, and so on because they’re so powerful in terms of generating higher returns. And that’s when I came up with that number.

Michael: Interesting. So I guess the big asterisk to the whole thing about 4% rule and that original research is just, today, we do have more investment opportunities. We own more than it – lower than two-asset class portfolio, large cap U.S. stocks, intermediate U.S. government bonds, and nothing else. And I guess it’s no great surprise, or as we know from modern portfolio theory, in theory, if we have more diversified portfolios, we can get better risk-adjusted returns. And I guess, when you put the safe withdrawal rate lens on it, you get a similar effect, more diversification and less volatility for a unit of risk. And then, you end up with more retirement income sustainability, and your 4% rule becomes a 4.5% rule.

Bill: Yes. And I don’t know how much further you can take that beyond as you introduce more asset classes. Does it become a diminishing return? It’s one of the issues I’ll study over the next year. When I throw in all these other asset classes, does it improve it? I did a research paper a couple of years ago where I just used small cap stocks very, very heavily. It turns out the withdrawal rates were off the charts. In some years there are as much as 25%. Imagine trying to retire with a 25% withdrawal rate, taking a quarter of your portfolio and lasting 30 years. But there have been a number of situations where that prevailed, and many other situations there have been double-digit returns as the norm with small cap stocks. So, there are still a lot of things to look at.

Michael: Interesting. But the overall gist to me that I think is just as notable from where we stand today – like the 4% rule came not from average returns, it came from the worst thing we could find in history, which is pretty much still the worst thing we can find in history because history hasn’t really changed. The 4% rule for you actually moved to a 4.5% rule just given the amount of modern diversification we can own today compared to the original two-asset class portfolio that you were looking at originally. And this kind of balanced portfolio in the middle really was working best. If you go too heavy in equities, you just get crushed in a bear market. If you go too conservative, scenarios like the 1970s inflation kill you, and the thing in between gives you the stocks for the inflation hedge and the bonds for the stock hedge and off you go.

Bill: Yeah. One thing I noticed when I introduced the small cap stocks, because they’re much more volatile asset class than large caps, where before I had a very wide plateau between 45% and 75% stocks. It narrowed it down to 50 or 60 as being the optimum equity allocation.

Michael: Interesting. So as you got more diversification in there, it kind of narrowed in like here’s really the optimal balancing point of enough but not too much on the risk spectrum.

Bill: Exactly.

Michael: So I am curious then, what did this look like in practice with clients? Was this something you used in practice with clients? Was this like cool research but we still have to do it other ways when you get down to individual client’s circumstances? What did the 4% rule or 4.5% rule look like for you as a practitioner with clients?

Bill: Well, when I started my practice, I didn’t actually have too many clients in retirement, okay, they tended to be closer to my age and only in the later years of my practice. But clients liked the idea. They understood the basis. They read the material. They thought it was sound.

And as financial planning software got more sophisticated, every year when we did our annual review, I would give them an update showing where it left them and it worked very well. I didn’t have any clients whose portfolios blew up as a result of that. They all looked like they were going to be trending well. Of course, we’re running to massive bull markets at the time, which is an ideal environment for any withdrawal plan. But it was very successful. You know, and I think it enhanced my clients’ confidence in my skills.

Michael: So as you were going through that, where you…and I recognize financial planning software looked different at that time than it does today. Was this like you would have a conversation with clients about the 4% rule on what’s sustainable and you can say something like, “Your spending seems to be in line with that so you’re good.”?

Or are you still also pulling out financial planning software and running projections there as well? It’s like a, I don’t know, like belts and suspenders reaffirming, like, “Here’s the 4% number but we’re also going to run it in your planning software just to see.”? Or didn’t bother because the planning software always said it was good if they were doing a 4% rule in the first place? What was the balance between having a conversation about something like the 4% rule and then this software stuff that we’ve got to do financial planning projections?

Bill: Yes, some of the earlier financial planning software was based on spreadsheets, as you know. They were very cumbersome to use. So I just basically reviewed with my clients every year indicated…I compared the balance that they had in their account with the balance we thought they should have based on the 4.5% rule.

But as it became more sophisticated planning, I actually was able to run a detailed 30-year plan or 20-year plan for them every year, more years of reviews. So that automatically just confirmed to them that things were on track. That made my job a whole lot easier. Although, I still think there are things financial planning software could introduce to take full advantage of the results of the research.

Michael: So what would you have liked to see or want to see now in planning software that you think would fit this even better?

What Features Bill Would Like To See Incorporated Into Financial Planning Software And What He Thinks About Monte Carlo Software [36:12]

Bill: Well, sooner or later, you know, market circumstances are going to change and people’s withdrawal plans may start to fail, perhaps because they were too ambitious. They decided to take out 6% when they were advised 5% and market circumstances didn’t favor their decision.

So, I think financial planning software needs to have the ability to – let’s say, if we’re comparing two specific historic scenarios – let’s say the investor retired on October 1968; we can track my client’s withdrawal rates each year against the withdrawal rates for those hypothetical clients and see how they’re doing. If they fall under their curve, then they know they’re in trouble. They are going to have to make some adjustments to their plan. And that’s a very difficult thing to do now. There’s no easy software solution for that I’m aware of.

Michael: Yeah, I know there are some one-off tools that have started trying to do that. BigCharts has an illustrator that does that. Timeline has an illustrator tool that does that. But they live as standalone tools. The financial planning software packages – like the full package ones that most of us use as our anchors – don’t seem to build any of that in.

Bill: Yes. Well, as you know, for most clients, their wealth grows during retirement even though they’re withdrawing. So, generally, most clients have a very favorable environment. It’s been a long time since they’ve had to worry about the other problem. But that is just a matter of time. Everything comes around in financial planning and this goes, too.

Michael: So how did you look at or think about things like Monte Carlo software as it came forth? Because I know when you started this research, it wasn’t out there. We lived purely in spreadsheet software. I think Monte Carlo started hitting the financial advisor world in the late 1990s when Hopewell did an article in the “Journal of Financial Planning” and kind of put it on the roadmap when we started seeing it get added to planning software a couple of years later. So as Monte Carlo came in, how did you look at 4% rule or 4%-rule conversations?

Bill: I didn’t use it a lot. I might utilize Monte Carlo analysis in my research. I’ve pretty much stuck to the spreadsheet approach. Although, I recognized the Monte Carlo approach has enormous value because you can examine a lot, thousands of scenarios very quickly. It all depends upon the assumptions that you use as to the event which relates to the value of the outcome.

I’m assuming that the people who are issuing these warnings – grim warnings about 3% rates and 3.5% – are using Monte Carlo software to generate their predictions. So I haven’t seen how that happens. So it’s hard for me to comment on it since I haven’t worked with it that much.

Michael: We actually did an article on this on Nerd’s Eye View a couple of years ago, just this comparison of either 4% rule or just generally using historical market scenarios and comparing it to Monte Carlo projections. I think we tend to criticize historical analysis, “Hey, why only look at 100 historical market scenarios when you could look at 10,000 or bajillion from a Monte Carlo engine?” And, “Hey, what happens when we look at the full range of stuff?”

And what we’ve found in the research, when we modeled it, is that Monte Carlo actually illustrates a rather material number of scenarios that are literally worse than anything we’ve ever, ever seen in history. And on the one hand, to me, that sort of makes sense. We only have 100-plus years of historical draws. If you do 10,000 draws from a Monte Carlo engine, you should get a few things that you’ve never seen in history.

But some of them get really extreme. As much as we sometimes talk about the worries of what happens if the future is worse than the past, with Monte Carlo, if you don’t otherwise adjust it for most planning software, you can have two years in a row where the market crashes 25%. Monte Carlo still assumes it’s equally likely to crash again in the third year.

In the real world, as we see in the historical data, by the time you go down 50%, things get cheaper and buyers tend to start showing up and yields get better and the situation changes. That’s baked into the historical numbers, and that’s not there in the Monte Carlo analysis – or at least it’s not there unless you create some separate assumptions to put it there, which most people don’t.

Bill: Yes. And maybe that phenomenon is what accounts for the very dire forecasts some give. I think it’s important to realize that both methods, my dark method and the Monte Carlo method, are valuable and have their place in addressing the problem, but neither one of them are predictive. They have no predictive value whatsoever because the future can be completely different from what we’ve experienced.

Michael: And so just as an advisor going through those conversations with clients when you’re working with the client base, how do you have that conversation, right? I mean, to some extent, it’s the one we always live with, right? The past is not predictive of future results.

“Now, let me show you everything we’ve learned in history about how markets work and invest your portfolio and give you recommendations accordingly.” We have to because otherwise, you’re just operating completely blind. So we have to use something. But how did you balance that, “Hey, I’ve done all these analyses based on historical scenarios, which we say are not predictive of the future, but I still have to give you recommendations that I’m going to give you based on the historical analysis.”?

The Conversations That Bill Had With His Clients About His Analysis-Based Recommendations And Adapting The 4 Percent Rule To Clients’ Unique Situations [41:48]

Bill: You have to be very upfront with clients and explain to them that this is not a science we’re doing. Okay? It’s not like Isaac Newton sitting down and developing his three laws of motion in physics, which will probably stand for billions of years into the future. What we’re doing is almost a social science. We’re examining the past and we have data, but we don’t have an underlying theory that relates data and facts. So we can’t use it to predict anything. We can only use it as a guide.

Michael: So as you went through this with clients, was 4% rule largely your number, or did you start using 4.5% after you did your book and kind of found, “Hey, once we get more diversification here, this number goes up.”? Did you have a different number you used for some clients?

Bill: I use about a 4.2% number to start. But you know every client’s situation is different. I had clients that were 5.5% because they are expecting a large inheritance, let’s say five years down the road, that they’re fairly certain of. And I have clients who were down at 3% because they had a pension plan that had no inflation adjustment. So over time, they were going to have appreciating demands put on their portfolio to support their income stream. So, yeah, we start with four, but there’s a wide spectrum around it.

Michael: And so, how did you get to those adjustments of, “Hey, because your pensions are missing inflation adjusting, you probably should be at three instead of four.”? Was that just years of experience in running these numbers a bajillion times and you knew where people were likely to end out? Was that a, “No, I’m still going to pull up my planning software and try to do these, I guess, the time spreadsheet projections and try to figure out what a reasonable number is for you.”? How would you get to the individual client’s adjustments?

Bill: Yeah, I’m not smart enough to do that off the top of my head, Michael. The financial planning software is an essential part of that. I just had to run the numbers and show them how it worked.

Michael: So to you, it sounds like the 4% rule wasn’t necessarily an alternative to, or in lieu of, planning software. It was a, “Well, if you put this number in, you’re going to get a plan that works.” And if it’s a client with a “regular” situation, that’s probably the number you’re going to get out with anyway. But if you’ve got clients who have anything else going on, as many of them do, we’re still ultimately back to planning software to make sure we actually get a number that works for them?

Bill: Yes.

Michael: And so, on an ongoing basis, how did you look at this? It sounds like we’ll just pull up data numbers and see how they’re running relative to the original projection and just make sure, “Is our current year withdrawal rate still reasonable?”

Bill: That’s exactly right. Yeah, we have to keep a track record of all the target portfolio value targets that have been established in early analyses, and we just bring them up at each year’s meeting and see where we are. And generally, it would exceed them because of bull markets, you know. Well, 96% or more, well, people end up with more than they started with on a nominal basis.

Michael: Right. Yes, I think that’s something that people miss a lot. If you look at those historical scenarios and with the 4% rule, 96% of the time, your whole nest egg is still leftover at the end.

Bill: That’s right.

Michael: So, did any of this change when 911 happened and just the tech crash and the recession and the decline in the early 2000s? I get it. It looked great in the ’90s because we’re in a bull market anyway. I mean, you probably could take 6% or 7%, you’re still going to be okay for the first 5 or 10 years because the markets were so good. Did the conversations or the dynamics change for you once the recession and 911 hit?

Bill: Well, I explained to my clients that even though the markets come down considerably, we’re in a terrible bear market. Things don’t look good. Tech stocks have crashed. We’re still nowhere near where we were – let’s say the 1970s – where inflation was raging and there was an oil embargo and stocks went nowhere for 16 years. It just doesn’t compare.

So although those were scary times, I said, it’s not time to send an alarm. It doesn’t require any exceptional methods or…

Michael: Well, I think you make a good point that the markets, basically, had a decade and a half of being flat from the mid-1960s to the early 1980s, and so – plus double-digit inflation on top of it – so even worse in real terms. And when you look at it from that perspective, I guess, as rough as markets have been and as volatile as markets have been, we are still doing a lot better than what it was in the 1970s.

Bill: Yeah, the Fed has been the friend of investors for a long time, a quarter of a century now.

Michael: So as you build on this in practice, how did the practice shape up over time? Did you end up in this realm of working more and more with retirees because you were the guy that put this retirement research out there? How far did the practice grow as you went down this road?

How Bill Created His Lifestyle Practice And What Prompted His Decision To Retire  [47:02]

Bill: You know, I decided I didn’t want to take on a partner or grow the practice to the extent that I would depend upon outside help. So there were times when I actually closed my practice to new clients. And sometimes that would last for six months to a year, and then the opportunities would open up and I’d reopen. And that was the thing that went all through the late ’90s and the early 2000s, in the early 20-teens.

Michael: So you got it to the level of, “This is how many clients I’m comfortable with. The math is adding up well. I can put food on my table and save for my retirement. I’m good. I don’t need more clients than this.”

Bill: No, I was happy financially with the income I was deriving from the practice. And I didn’t want the hassle of getting into a larger business because I’ve been there and done that. Right, this was 400 employees. I don’t need that anymore.

Michael: And as you built in that direction, how many clients did you find was your comfort point? When was it no more for you?

Bill: I got up to about 80 clients. I found that was about all I could handle, the real books that I had. That was a comfortable number, so I tried to keep it right around there.

Michael: Okay. So you got up to about 80 clients and kept it there. My guess is that if you leave or move or, unfortunately, pass on, you free up a few spaces. You add a few clients back in and just for you and your wife helping you in the practice that was the comfortable level of, “I can serve these clients, the income is good. We’re going to hang out here.”

Bill: That’s right. No, even with that limited number of clients, I spent a lot of hours working nights, weekends, and I’m sure a lot of solo practitioners do that. I was younger; I’ve always enjoyed working hard. But if I had to do it over again, maybe I’d hold up to 60 clients.

Michael: It’s the amazing thing about the advisory business, though, is just clients tend to stick around as long as we’re servicing them well. They pay a pretty good dollar amount per client at the end of the day. You don’t need an immense number of client relationships to have the math add up pretty well.

Bill: No, it’s really, to me, it’s beautiful profession. At least, it was back when I was in it. You have a very close…you feel like you’re really making a difference in people’s lives on a day-to-day basis, you have a direct personal contact with them, they can get you anytime they want to. And you know you have the technical skills and the support systems to do whatever they need to get done. So it’s very, very, very satisfying.

Michael: And so, how long did you continue to run the practice? When did you ultimately decide you were ready to be done done?

Bill: Twenty-five years, just about, and that was 2013 when I retired.

Michael: Okay. And so, what drove the decision to retire in 2013?

Bill: Well, it was a combination of things. I had a grandson on the East Coast I wanted to see. I want to be a good grandfather. And you know, the demands of time were still very heavy for the business. And I felt the winds of change are approaching too. There were so many things going on, particularly on the regulatory area. Even though I had an outside consult, I think I was finding it more and more difficult to compete with some of the larger firms who offered a broader range of services.

Quite frankly, I had concerns about the market, investing. I always told my clients that I would invest my money exactly as I invested theirs. As we moved into the middle of the 20 teens, I didn’t think that was possible anymore. I felt I needed to get much more conservative, but I didn’t want to impose that on them. Because the market could continue to go up. And so it did. So I figured I had a good run, time to cash in, go on to something else.

Michael: And so was that just a function of what was going on at the time? We were a couple years out of the financial crisis, the Fed was doing its thing, and just feeling like, “I don’t know that I want to keep playing this game with the uncertainty we’ve got in the current environment.”

Michael: Yes, I mean, I did a great job. I got my clients completely out of the market in late 2008. So they never suffered the losses that other folks did. On the other side, I did a lousy job getting them back into the market after the crisis ended. If I knew then what I know now, it would have been a completely different process. But the whole financial planning profession is built around buy-and-hold philosophy, I understand that.

But to me, it’s never been justified that that is the best approach for planners and advisors to be using with their clients. It’s almost become a cult attitude in itself that if you introduce the idea of what’s called market timing or risk management, other planners will just shout you down. They don’t want to hear it.

I think that’s a mistake. I think our profession needs to be open-minded and look at alternative means of managing money and not just assume that buy and hold is the correct way to do it. Buy and hold is what I used in my analysis, my 4% rule. One thing is because it’s a lot easier to analyze things than multiplicity ways you can manage money by other means. But just because I did that analysis, I told people, it doesn’t mean you have to manage your money that way.

Michael: So talk to us about the shift then. You’re getting completely out of markets. Was that before the crash, in the middle of the crash? When did you make the shift out? And how did that play out in practice with clients?

How Bill Used Valuations And Risk Management To Protect His Clients’ Assets During Market Downturns [52:37]

Bill: I remember my wife’s brother, who lived in Alabama, passed away in September 2008. And before I left the office, I had clients essentially down to zero stock allocation, maybe a couple percent. And then, in Alabama, I sold what was left.

So we rode through the entire months of October and November, which were terrible, I think the market lost about 30%. We went through the December recovery, and then January and February came along and the market got crushed again. So my clients were very happy. You know, I got a lot of nice calls. Who wouldn’t? “You know, you saved me 30% of my portfolio, 20%, that’s great.”

And I remember going to an FPA meeting late in November of 2008. And advisors, you know, they look like they’ve just been beaten to death. They didn’t know what to tell their clients. They lost so much money for them. They were literally in tears. And I wasn’t in that situation, which I thought was cool.

Eventually, of course, the money came back, or a lot of it. Thanks to QE. But I didn’t have the process in place at that time to get back into the market. There were clear indications now, if you look at that March and April we should be heading back in there heavily.

Michael: So when, ultimately, were you getting clients back in?

Bill: 2010 I was starting to move back in but I never put them into a full allocation, which was a mistake. That was just a bad mistake on my part. I just didn’t have the process in place, didn’t know what to do. I had a good idea of how to get out of the market. But I didn’t have the other half of the process, which is essential, getting back in.

Clearly, valuations were cheap then. If you’re into technicals, you can look at the technicals and say, “Hey, things are definitely changing here.” And it was a very scary backdrop then. People were calling for the end of the world. But that’s not what you need to listen to in investing, you need to focus on other things to be successful.

Michael: Now, I’m still trying to think of just the timing. I mean, from a practical perspective, if you were out in September before the worst brunt hit, I’m thinking that even by 2010, we weren’t actually back to where we started. You were still actually getting it cheaper than when you got out. Just also missed the really sharp, the off bottom, you could have gotten much lower, pulling the trigger earlier in 2009.

Bill: Once again, I didn’t fully invest my clients, which I should have. Prepare them for the huge run that followed.

Michael: So what was it that you were seeing in 2008 that made you say, “I’m actually taking my clients dollars out of this”?

Bill: Well, I listened to them. I was doing a lot of reading at the time, seeing that housing is in huge trouble and the banking system is in huge trouble. They used components of the financial system. Stocks look very feeble. I said let’s just get out of here. And, to me, preserving… I was listening to Warren Buffett. Warren Buffett said, you know, the first rule of investing is never lose money. The second rule is don’t forget the first rule.

So preserving capital has always been important to me. So I just thought the risk was so great at that point. I said let’s get out and sit and wait and see what happens and how they resolve this. And I have seen every weekend that they were working to patch up another leak in the system.

Michael: Yes. So as you look back on this now with kind of getting out before the sharp V down, but then having trouble getting back in as the market came back up. Like, in retrospect, do you wish you had just held it all the way through, took the drawdown, but gotten to participate in the recovery? Or do you just view it as, have a stronger process to say if you’re going to get out, make sure you know what your trigger points are to get back in, but you would still go through that process again?

Bill: Yeah, I would prefer to have a stronger process. I just don’t think it’s right to put a client through that kind of a drawdown for which I had to be rescued by QE. If it hadn’t had that QE, the market never would have recovered, I don’t think, that quickly. And they would have been waiting a long time to get back to where they were.

So we’re depending upon the largesse of the government to preserve your capital, that’s a thin thread. I would prefer to have a much better process, which I have now. But that’s one of the risks.

Michael: Were there other times, and I guess in the almost 15-plus years where you had done the research and were working with clients before that, where you had so reined client risk exposure back? Or was that basically the first time you’d ever felt the need to really pull that trigger?

Bill: No, I did that in 2002. We saved. And there I got back into the market more efficiently than I did in 2009 and 2010. We missed a lot of that bear market from 2000 to 2002. It was an obvious bubble, you know, tech stocks. I had clients coming to me asking me to invest in certain stocks and telling me about offers they had from the guy down the street who was starting up a tech business and who was going to go to the moon. I said that’s not a good sign. Let’s lessen our allocation. So we did, and we got it back. But it wasn’t as scary of a time as 2008, 2009. We looked at how the entire financial system was going to burst worldwide.

Michael: And so how do you view the process differently now of what you will look at to either say it’s time to rein clients back, or even yourself, and what does the process look like to get back in if you have another one of those and you want to get back in?

Bill: Yes, it relies heavily on valuation, but I also subscribe to a service, the market… They don’t call it market timing; they call it risk management, which helps me because I tend to be naturally conservative. It prevents me from being too conservative.

Michael: So you said you looked heavily at valuations. Is there a particular valuation measure or trigger that you look at? When do you actually decide to act? What does that model look like now?

Bill: I have a strict test based on valuation. I don’t know if you’ve seen some of the charts that John Husband has produced which show basically that if you got out of the market at certain valuation levels and went to treasuries, you would find that the market will return to those lower valuations. So I use that as a basis and I have a schedule of the allocation in stocks against, let’s say, a particular Shiller CAPE level. Right now, on a quite low level and probably around under 15% equities, given this environment.

Now, the subscription service I use is much higher, but I just don’t feel comfortable. But I’m doing something that I don’t think is practical for a person who manages money professionally. I’m managing money for my family and myself. And if I want to stay out of the market for 10 or 12 years, no one’s going to complain to me about that. It’s very difficult to do that with the constant pressure of what their neighbors are doing.

And to a certain extent, I think the profession has trapped itself in creating client expectations that the market will always come back, and it’ll come back quickly. That’s not true. We know there have been long periods of time, like after the 2009 crash or in the ’60s and ’70s with stocks went nowhere, where it didn’t get back to the earlier levels for a long, long time.

And that could happen to us again, I just think that the profession ought to pay attention to that and give it some study before they reject more active management a lot of thing.

Michael: Because we built such an expectation that markets come back and always come back quickly that if at any point we’re wrong and it really actually stays down for quite a while, suddenly, we’re gonna have a whole lot of problems.

Bill: Well, you got a lot of explaining to do. You’ll have a lot of explaining to do to your clients. You built up these expectations and, yes, they’re going to rely on you for that to happen. And we know it always hasn’t happened. So what is the basis for us developing that expectation to them? Got to depend on the Fed?

Michael: And out of curiosity, what is the risk management service you use to supplement your work that you find is credible and worthy?

Bill: InvesTech, which is Jim Stack, based in Montana, which is a good distance away from any financial centers. So it gives them a certain perspective, like Warren Buffet’s got in Omaha there.

Michael: And so when you decided to sell and exit the practice, how did you go about selling the firm?

The Process Bill Went Through To Sell His Firm [01:01:24]

Bill: I decided I would hire an expert, a third party who dealt with those buys and sells. So I called them up and got the ball rolling. And I went to a number of interviews with firms. There were two problems I encountered. One, some people felt, because of my reputation, is why I had some of the business and that after they took it over, it might leave.

Michael: Right. If they came for Bill Bengen and his 4% rule, if there is no more Bill Bengen running the firm, does that mean the clients are going to stick around or not?

Bill: Yeah, my halo was gone. And the other aspect too was that since I was an active manager, and most of them were not, they’re going to be dealing with a different set of client expectations than they had with their clients and with mine. So I went to a lot of disappointing interviews.

But finally, another financial planner said, “I know somebody in San Diego that’s maybe wanting to expand.” So I called up, it turned out to be an old friend. “And yeah, we’re interested.” And we got to talking and we still used a third party as a go-between to keep some distance between us. I felt that was important, so emotions didn’t get involved.

But that worked very well. I eventually sold my practice to them. I was heavily involved in the transition process. I sat, in fact, in every interview that my clients had with them. And I feel great because they’ve done a great job for my clients. I felt like my most important responsibility was one at the end where I handed my clients off to somebody who would treat them as well, I felt, as I was treating them.

Michael: And so, as you look at it today, you’ve now done literally decades of this research, you’ve lived it, you’ve lived with multiple market cycles, so I guess I’m wondering two things. One, how do you look at the 4% rule today? Is that still the number, or is it 4.5% or is it 5% or is it something else?

And how do you think about the balance between… what strikes me is there’s really two levers to this. There’s what you’re doing with the withdrawal rates and there’s what you’re doing with the portfolio for which you are not a passive participant, you’re a more active participant. So what do you see as a safe withdrawal rule? And how do you think about integrating the withdrawal rate rule and these tactical shifts?

How Bill Views The 4 Percent Rule Today [01:03:39]

Bill: You know, if you had asked me that question a year ago, I probably would have told you what I’ve been doing for the last 27 years. But in the last year, I’ve done some research, which, you know, is based upon research you did back in 2008 where you found there was a correlation between stock market valuation and the withdrawal rates. They were successful. I looked into that more deeply and found a way to enhance that.

Once I found that particular message, it’s a whole different approach. Right now, I would not be recommending 4.5% to clients as a starting point. Depending upon the inflation level and the level of the market, I might be up to 13%, which historically, there were periods of time when you could take withdrawals that high. It’s not a great time to be taking high withdrawals now with the market so expensive, but it’s not awful either because inflation is very low.

Michael: And so, what do you think about as the number in the environment today?

Bill: I think somewhere in 4.75%, 5% is probably going to be okay. We won’t know for 30 years, so I can safely say that in an interview.

Michael: And you think of that paired with, it sounds like, with a more conservative allocation, at least for the time being given where valuation is?

Bill: Yeah, I think in the course of my career, to avoid large losses, yes, with the thought that if the market were to return to historically reasonable valuations, let’s say, high-teens, mid-teens in the Shiller CAPE. Then I would look in to get very, very aggressive in stocks. Maybe higher than 50% to 60% I would recommend because there are very few sources of reliable income. And fixed-income investments are giving me nothing. So, I thought I’d go to 80%, 70%, 80%, 90% dividend-paying stocks if I could get them at cheap enough prices. I’m not concerned about safety. Because if you buy something at the right price, you’re good for many years. So that’s kind of a radical change in my view, but I think that is necessitated by the times.

Michael: And all driven by this combination of low yields, which will drive you towards more stocks but low inflation, which actually gives you comfort that we don’t need to be hanging out down like 2% or 3% withdrawal rates, high 4% is enough, 5% is still reasonable because at the end of the day, when inflation is this low and you’re only spending a few percent, you actually don’t need a huge amount of growth in your portfolio.

Bill: No, but once you get into preserving the capital, when you retire, you’ve got that chunk of money, you want to preserve it; you don’t want it to get diminished by any substantial amount because it may not come back. It may not.

Michael: So how do you look at the journey of building your own advisory firm? Like what surprised you about building an advisory business?

What Surprised Bill About Building His Firm And The Low Point In His Journey [01:06:33]

Bill: I was surprised it was successful, quite frankly, because I’d never been out on my own. I worked in a family business, which is not quite the same as working on your own. So I didn’t know if I could do it. I didn’t know if I could attract clients. I didn’t know if I could earn their trust. I worked hard in getting the technical knowledge, the CFP. Probably, in my early days, I always read a lot about investments. I have help – most comfortable in that particular area. But, you know, financial planning is a lot more than that, as we know.

But over time, I gained confidence. Financial planning is a complex area, people just struggle with it and they really need somebody to help them. It’s great that I was able to get myself into that position.

Michael: And so I am struck, as you said, “I didn’t know if I could do it. If I could attract clients. If I could earn their trust.” But you did take the leap.

Bill: Yes.

Michael: Like, “Well, I’m just going to work. I’m going to go forward, anyway.” So what gets you comfortable taking that leap with that much uncertainty? Particularly because, as you said, you are a conservative investor by nature, so it strikes me that’s a fairly aggressive thing to do for someone that takes conservative positions?

Bill: Because I think I found out in my life that when I took certain leaps of faith, they managed to work out, as they did. I only applied to one college, MIT, when I applied for college. Which, as I look back, is a pretty stupid approach to a college application. But I wanted to go there, and I said, I’m just going to do it.

And when we moved to New York, we made our decision very quickly from New York. And that worked for us. I’ve had other things in my life where… And in individual life – I think, it pays to take big risks when your situation is going to change, it’s going to come to you one way or another.

It’s like, have you ever watched the show “Monk”? I don’t know if they’ve watched it. There was an episode of “Monk” where there was a saying, someone was talking about their grandfather who became very rich doing something and he said, “Leap and a safety net will appear.” And I think that’s a pretty good motto.

In many things in life, you just need to take a leap, because if you don’t take the leap, you’ll never take the risk, you’ll be frightened of things. I don’t think that applies to investing. Investing is a whole different discipline. Different rules apply.

Michael: Because in investing, the rule is to protect your capital and don’t take large losses. But in the personal realm, if your situation is changing anyway, you may as well take the leap, because the upside is actually rather large when we change our life trajectory for the better.

Bill: I think that’s the difference.

Michael: So what was the low point for you on the journey?

Bill: Oh, what was the low point on the journey? Probably in 2009, when I was struggling with the market and getting clients back in. I felt awful watching the market rise and my clients not getting the full benefit. Even though I knew we were well ahead of the game, it still made me question what I knew. And that was painful. Up to that, it had been a glorious ride and a lot of fun.

Michael: And I am struck though, for some advisors, they go through a scenario like that and make some investment calls, and they don’t work out, and they say, “You know what? I’m not going there anymore. I’m just going to go more passive, more buy and hold, I don’t want the stress or the burden of doing that.” And then others seem to go in the direction that you went, that said, “Well, I’m going to improve my process and we’ll make a better call next time. But I’m still comfortable and committed to this path.”

Bill: Yes, I did that because I thought that the things that created my problems were artificial things like the involvement of the central banks around the world, which hadn’t been in place in earlier years, the ’30s, ’40s, ’50s, ’60s, ’70s, ’80s. They are relatively minor players. And now, all of a sudden, they’re a big player.

And I’m just wondering how long they can sustain markets at excessively high valuations and keep blowing bubble after bubble. It’s just very dangerous for investors to passively jump into a lake that is being warmed by Fed heat.

Michael: And so, from your perspective, then it’s, we need to figure out how to adapt the models and processes to say, yes, this is a high-risk environment, but you don’t necessarily fight the Fed. But it is a very high-valuation environment.

Bill: Yes, that’s right. If I had been a subscriber to that InvesTech service back in 2009, which I was not, they were recommending in April clients get heavily back into the market. That would have been my signal. That was part of my process that was missing.

Michael: So as you look back, is there anything else that you wish you’d done differently? Is there anything you know now that you wish you could go tell you from the early 1990s as you were getting ready to launch the firm and become a financial advisor?

Bill: No, I just had such a great time. And there weren’t any firms available that I felt I could have partnered with in the early years, anyway. So my options were limited. So no, I don’t have any regrets about what I did and how I did it, except near the very end. The market became difficult. But my clients were wonderful, a wonderful group of people. Just having that day-to-day relationship with them and helping them and having their trust, it’s beyond words.

Michael: So what advice would you give for younger and newer advisors coming into becoming a financial planner today?

The Advice That Bill Would Give New Financial Advisors And How He Views His Own Advice From The Perspective Of A Retiree [01:12:15]

Bill: I still think it’s a wonderful field. I still think you can make a difference in people’s lives, so I think it’s a great career path. I think it’s hard to do it on your own. I think I would say to get your education and try to get an internship and follow a path into a larger firm where you have support systems about you. You’re not relying on your own resources in a very difficult environment.

Michael: So out of curiosity, anything you’ve learned as a retiree, compared to what you advised retirees – does the view look different from the other side of the retirement transition as you think about the advice you gave and now the advice you’d want to receive as a retiree?

Bill: I always told my clients, they should be thinking of retirement as moving towards something, not away from something. You’re not moving away from your work life. You’re working to a whole new scheme of life. And that therefore you should have things, whether it be hobbies, activities that you want to be actively involved in and know what they are. And perhaps setting the groundwork for that before you retire. I’ve got my writing, my research, which is part of the reason I retired. I want to have more time to do all that.

And that’s worked out very well. So I feel pretty comfortable how retirement… I can’t even call it retirement. I’m putting in five days a week of writing. Weekends are still meaningful to me, believe it or not. It’s not all one anomalous, amorphous time span. There are weekends that are workdays. And I expect that gives meaning and structure to my life.

Michael: What about from the perspective of retirement and spending advice itself? Does thinking about things like the 4% rule still feel comfortable for you as a retiree looking at your portfolio? Does it feel different when you’re on the receiving end of thinking about that advice and applying it in scary environments like we’ve had in the past year?

Bill: Well, yes, this is it, boys. This is not a drill. This is the real thing. But my wife and I are pretty conservative. At my age also, you have to raise your spending target as you age. We could probably 5%, 5.25% versus 4.5% very comfortably. We don’t spend that much. We just don’t. There’s not much we want to spend it on. We’re not into things. We’re not into toys. We live our ultra-modest lifestyle. For us, it’s fine.

Michael: Would you change the view around recommendations to clients or anticipating that? I don’t know. Maybe your spending is not going to lift up as much in the later years because you just may not want to spend on things once you’re comfortable with your life?

Bill: Spending would increase with inflation right through to the end of life. What I found out is that your spending on health needs will increase over what you had earlier. And also, if you have family members and you want to give them money, that should be built into the plan. That should be treated as an expense. And that should increase as you age.

So I told my clients that they should not expect their expenditures to be reduced later in life. They should look at giving money, charity, to family members, whoever. And I just find that’s worked well for me.

Michael: Because in practice if you’re used to seeing a certain amount of money flow out of the household and you can afford to have that much money flow out of the household. We find a way to do it. If you don’t want to buy things, you can give it to the grandkids or whoever else you want or give it to charity.

But just, if you’re used to a certain dollar amount flowing out, and that’s comfortable, we find a way to use it or to consume it or give one away or do something with it, which just means those outflows are sustained even if it’s not purely personal household spending.

Bill: You should enjoy your money. And part of enjoying your money is giving it to other people, your younger, and helping them in their lives. And/or give it to charities who are desperate right now in this time. I don’t know how many charities locally we’ve been helping. The zoo, the animal park, museums, they’re desperate for funds now, just absolutely desperate.

Michael: So what comes next for you? What are you working on now?

What’s Next For Bill And How He Defines Success [01:16:33]

Bill: Well, I’m gonna finish this novel next week. I have been trying to get it published. No luck so far. I’m still writing those literary agents. I’ve written about 600 of them and nobody’s responded.

Michael: This is an industry related or this is novel, like fiction novel?

Bill: Fiction novel and it’s a trilogy. There are three books. And I’m almost done with it. I should be done with it by next week. And then I’m going to really start seriously… I’m going to take a break and seriously start poking on continuing on my 4% research. I want to upgrade my book, revise it from 2006. I know it’s going to be a much bigger book now, a lot more charts in it.

I had trouble with the publisher the first time I came through. It only had 170 pages. “This is not long enough for a technical book. You’ve got to add something.” I said, “Well. what do you suggest I add?”

Michael: Pictures.

Bill: Yes, pictures. No. To me, a book is just like a story or writing a novel. My first novel, my coach said it’s too long. And I said, “Well, I wrote until I ran out of story. Right? That’s what I did.” So I was able to cut it in half. You know, I think you just keep doing things until you run out of energy or ideas. That’s life.

Michael: Like what’s the focus for you on the research end? You’ve lived and done this research, published multiple papers and an entire book on it. What do you view as the next frontier in the research or the next area that you want to add to it?

Bill: Well, I think I made a big advance with that research paper based on your work. And I think that provided the last tool in the toolkit that I’ve been wanting to give advisors to completely manage the withdrawal process. At the front end, specify what the withdrawals would be, monitor the process during our clients’ lifetime, and then have some sort of a system in place that if they need to make changes and that their withdrawal plan is failing, how do you do that? And I think now we have all of those.

What I’m doing now, basically, is just updating a lot of the numbers I have that are 14 years old. I want to make sure there are no changes. There are so many variables. As I mentioned also, I want to look at using lots of different asset classes and see what the effect that one has on the withdrawal rate.

Michael: Interesting. So, it’s kind of this tie-in valuation, inflation, more diversification, different asset classes, and some kind of system about how you actually mix all of those together in practice to come up with particular client recommendations?

Bill: Yes. Also look at rebalancing and how frequently you should rebalance. A lot of folks do it every year. I don’t think that’s optimal for people in retirement.

Michael: Because you would do it more often or you would do it less often?

Bill: Less often. Primarily, because stock market rallies tend to bear/bull markets had occurred in four, five, six years, or longer periods of time. And if you’re rebalancing, you’re cheating the portfolio of returns. So I just started looking at that again. I hate to talk about something when I haven’t formulated some subtle idea, but the indications everywhere I look is that longer is better.

Michael: Meaning, widen out the rebalancing period so there’s more room for bull markets to run and you’re not just clipping your bull market continuously when you actually get one of the good bull market cycles.

Bill: And it could have a significant effect. It could be, maybe, a quarter of percentage point on the withdrawal rate. That’s not chicken feed. That’s another 5% or so.

Michael: Right, 5% lifetime spending that goes from 5% to 5.25% that’s nothing to shake a stick at. So as we wrap up, this is a podcast around success and one of the themes that always comes up is even though the word success often means different things to different people, and so, you know, you’ve had this run of contributing research to the advisor role, built a successful advisory practice and sold it with and of itself. It’s your second career after the first. How do you define success for yourself at this point?

Bill: Well, for me, success is achieving things that I think are important. Now, family is very important. So my grandson, my wife, and my kids are still very important to me. Keeping in close contact with them and passing along whatever help and whatever wisdom I can. And just simply whatever abilities I was given trying to get the most out of them.

You know, that’s why I continue to write because it interests me. And I think I can still contribute to people’s understanding of things. And that’s important to me. It’s more than the money. I’ve never made a lot of money out of the 4% rule. I’d say that much. But I always just felt very grateful I was able to give back to the profession which gave so much to me. So I’m happy to do it. It’s a thrill.

Michael: Very cool. I appreciate you joining us and sharing your contact story and the journey here on the “Financial Advisors Success” podcast.

Bill: Michael, it’s been a pleasure. Thank you so much.

Michael: Thank you, Bill.